The Hindu Business Line : Recurring social inclusion theme

The Union Budget builds upon the Finance Minister’s three-pronged strategy of last three years, i.e. focussing on social development, growth and economic stability. Measures announced in the Budget clearly underline an intent to spur domestic growth.

Emphasis on markets

The Budget laid strong emphasis on capital markets. Major among them were setting up the national market for securities, a high-powered committee for rationalising stamp duties and creating a robust bond currency and derivative market.Certain sectors such as infrastructure, auto and pharma will experience a positive impact. The Budget also announced that parent company to be allowed to set off dividends received from its subsidiary company against dividend distributed by the parent company, provided dividend distribution tax (DDT) has been paid on the dividend received by the parent company. In effect, it helps abolish the double taxation on dividends in holding company structures or special purpose vehicles vehicles.

The agriculture loan waiver is more of a social development measure, another way of financial inclusion. However, it is a big positive for banks, as in normal course of action banks would need to write off some part and charge it to operating profits but now it will be classified as good loan. Tax slabs increase at lower end will result in increased capital consumption at those levels. The incremental domestic demand actually comes from mid – lower income group.

Targets met

The Finance Minister has succeeded in more than meeting his fiscal deficit targets and has forecast a fiscal deficit of only 2.5 per cent of GDP for next year. Though the Sixth Pay Commission due in March 2008 and funding of 60,000 crores of loan waiver is a puzzle, but the Finance Minister clarified in a press conference that he will review ‘resource mobilisation’ after the Pay Commission submits its proposals.

Firstly, 2.5 per cent of GDP will give headroom to borrow more. Second, the government will pay banks as and when farm loans are due. The nation should assume that the Finance Minister has done his homework. In due course, he would reveal a scheme to write-off farm loans. We expect the government to issue non-SLR recapitalisation bond-type paper to banks.

The short-term capital gains increase of 5 per cent may be short term negative on sentiments but will not have an impact in the medium term. STT only on option premium instead of underlying value will help the growth of options market. Also, allowing STT as a tax deductible expenditure as against allowing it as a rebate against tax liability may impact some traders who have taken it negatively.

Markets were not expecting any big announcements and the Budget also makes adjustments while ensuring continued stability with no surprises and no changes. Overall, the Budget has been good and the stock market reaction is more due to global economic situation.

Continuing bias towards promoting infrastructure, the budget increased allocation to various schemes such as Bharat Nirman, NHAI, etc.

(The author is Managing Director, Institutional Client Coverage Group, DSP Merrill Lynch.)

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